IPCRI

מרכז ישראל/פלסטין למחקר ולמידע

مركز إسرائيل فلسطين للأبحاث و المعلومات

Israel/Palestine Center for Research and Information

 

 

IN THE INTEREST OF PEACE AND ECONOMIC GROWTH: SAVE THE UNION

 

AN IPCRI POLICY PAPER

 

June 2, 2005

 

 

 

The Customs Union – Background and State of Affairs

 

At the end of the summer when Israel leaves Gaza, the continuation of the current trade regime between Israel and the Palestinian Authority comes into question.  Based on the Paris Protocol - the economic agreement that was part of the Oslo Accords, a common customs envelope between the Palestinian Authority and Israel was created.  Under the customs union the PA agreed to the Israeli tariff rates and to Israeli standards.  As the PA had no control of their external borders, it was agreed that Israel would collect customs revenues for the Palestinians and to transfer those revenues to the Authority.  Furthermore, it was agreed that there would be a unified system for VAT clearances and again these revenues would be transferred by Israel to the Palestinian Authority.

 

There were many problems with the implementation of the agreement and the PA had many legitimate claims about revenue leakages as a result of non-direct imports.  In terms of revenue collections, in the opinion of the World Bank, the IMF and of the PA Ministry of Finance, this aspect of the agreement was quite satisfactory.  The revenues from customs collections account for 25% of the PA’s GDP and the VAT revenues amount to an additional 9%.

 

The Disengagement and the End of the Customs Union?

 

Now along comes Israel with its unilateral disengagement from Gaza. Prime Minister Sharon seems to be intent on implementing the disengagement in full, including Israeli withdrawal from the Phildelphi corridor and from the international border at Rafah between Gaza and Egypt.  Israel now claim that since it will not be in control of the external Gaza-Egypt border crossing, the Customs envelope arrangements must cease. What that means is that the crossing points between Gaza and Israel, mainly at Karni and Erez, will now become customs borders. For the economy of Gaza, this is next to a death blow. The costs of trade with all of the necessary and unnecessary security checks at Karni and Erez, including back-to-back trucking arrangements, are nearly too high to make trade economically feasible.  If customs borders, bureaucracies and inspections are added, trade with Israel or via Israel will become virtually impossible. The new arrangements will also create two separate trade regimes for the Palestinians, a customs envelope between Israel and the West Bank and a free trade agreement or Most Favorite Nation status between Israel and Gaza.

 

For the Palestinians, this is clearly an attempt by Israel of additional fragmentation of the Palestinian territories, which according to agreements are supposed to be related to as one territorial unit. Furthermore, the Israeli decision to end the customs envelope arrangement with the Palestinians is a unilateral breach of an international agreement between the two parties. 

 

Israel claims that an open border between Gaza and Israel will enable the Palestinians to import substandard goods and potentially infected produce from Egypt and Israel must protect itself. About half a year ago Israel proposed to move the border to the Kerem Shalom triangle crossing south of Rafah so that the customs envelope arrangements could continue.  Both Egypt and the PA immediately rejected the proposal.  They both claimed that the proposed new crossing would once again provide Israel with the key to close the border at any time Israel saw fit to do so.  This arrangement would be in their view a continuation of the occupation and of Israeli domination over Gaza and over the Palestinian economy.

 

The international community and the PA are very interested in continuing the arrangements of the Paris Protocol as an interim arrangement until Statehood when new trade negotiations will be held.  In the view of the technocrats in Israel, the PA and professional international observers and assessors, the arrangements have worked quite well. The PA refuses to enter into discussions that would raise the possibility of having two separate trade regimes for Gaza and the West Bank

 

The PA and the International agencies know that with a customs border between Israel and Gaza, the chances for economic growth in Gaza remain next to nil.  It is expected that in the coming years Gaza’s trade with Israel, the West Bank and the world will remain at about 90% of the total trade.

 

The international community, the donors and the professional agencies have proposed that after the Israeli withdrawal from Gaza that both sides will continue to honor the Paris Protocol.  Although the PA would prefer to take over the inspection and customs responsibilities themselves, they have agreed that the implementation on the ground would be done by a professional company – a third party, with international expertise and practice in customs collection, verification and issuing of certificates of origin and inspection of standards.  The Palestinians agree to continue to implement the agreements on the basis of the Israeli standards and tariffs.  The international company placed in Rafah would carry out the full functions of inspection, verification and collection of revenues, while at the same time working with the Palestinians to upgrade their capacity to fully take over in the future.  The professional agencies have proposed that a computer system be installed that will link the Palestinian system with the Israeli one, so that in real time, the Israelis would have full knowledge of every shipment entering Gaza from Egypt.  The International agencies have even suggested that Israel could conduct additional inspections as part of the regular security checks at Erez and Karni, if there were reasons to suspect the reports and documents issued by the international company.

 

This arrangement would enable the continuation of the customs envelope.  It would ensure that during times of security stability, trade and investments would increase and that there would be a chance for economic growth and development.  The donors have pointed out that in the past years Gaza has received the highest per capita donor contributions from any other place in the world throughout history, yet these donations have not made a real impact due to corruption and mainly because of the unsustainability of the situation on the ground.  Economic growth is only possible with real flows of trade. Without this, international contributions to Gaza will dissipate and Gaza will sink even further into deep poverty and despair.

 

Israel has rejected the proposals put forth by the experts and by the PA.  Israel claims that there is no trust and that Israel cannot depend on a third party to do the job in Israel’s place. Israel refuses to keep custom inspectors at Rafah for fear for their security. Israel’s refusal to consider the proposal for the 3rd party professional company is completely unreasonable.  We are dealing with some of the most renowned companies in the world - a British company and a Swiss company have been proposed.  Both of these companies do similar work in many other countries and yet Israel refuses to consider this proposal. Israel has not offered any other proposals, other than moving the border crossing.

 

The Israeli rejection is placing Prime Minister Sharon in a very difficult position and seems to be playing into the hands of the Israeli army.  The army has been opposed to the redeployment of Israeli forces off the Philidelphi corridor and away from the Rafah crossing. The army says that it cannot trust the Palestinians or the Egyptians and it is necessary to remain on the border.  Sharon, on the other hand, has stated that his intention is to end the occupation in Gaza, which in the view of his legal advisors requires that Israel not control Gaza’s external borders. It seems that some officials, in the army and probably in the Ministry of Finance (under Netanyahu) are interested in foiling Sharon’s attempt to remove Israel from the Gaza-Egypt border. The trade regime issue is being used as a pawn in the game and the Palestinian economy will be held hostage to the internal Israeli political whims and struggles.

 

The only reasonable solution is the one that has been presented by the International agencies and experts and supported by the PA. If this is not acceptable to Israel, then it is upon Israel to propose an alternative solution. Thus far, Israel has only proposed one suggestion that was immediately rejected by Egypt and the PA.  Since it is Israel that is intending to breach an international agreement unilaterally, it must be upon Israel to propose a solution that would enable the continuation of the current trade regime. If Israel will not trust one of the most prominent companies in the world to do the relatively simple job of managing the inspection of goods, customs clearances, etc. all based on the Israeli system and standards, then it is appears that Israel will not trust anyone.  Under these conditions it seems quite clear that Israel has no real interest in the economic growth and development of the Palestinian economy.  The end result of this lack of willingness to consider other possibilities is indicative of a lack of real interest in Israel for peace with the Palestinians.  Without a continuation of the customs envelope arrangements the Israeli disengagement from Gaza will not be successful, economic despair will bring about the next round of violence and Israel may find itself returning to Gaza, not as tourists or investors, but as military conquerors once again.